"One Size Fits All" Policy Fails to Fit China

飞雪寒冰

Huge economic gaps separate China's regions. In particular, economic output in three regions -- the nation's eastern, central and western areas – varies widely.

Per capita GDP in 2008 was US$ 4,790 in the nation's east, US$ 2,820 in the central region, and US$ 2,500 in the west. A comparison of incomes found in different provinces and municipalities reveals even wider gaps. For example, per capita GDP in Shanghai is more than eight times the Guizhou Province level.

In fact, output differences among China's regions are greater than the gaps that separate various states in the United States and countries in the euro zone.

Meanwhile, urbanization in China's east is much higher than in the west. And the economy in the east is more export-driven, as the contribution of exports to GDP in the east is 15 to 25 times higher than in the west.

Faced with a global financial crisis and the world's greatest economic downturn since 1929, different regions of China are being affected to different degrees.

飞雪寒冰

Hit the hardest are export-dependent regions such as Shanghai, Zhejiang and Fujian, as well as resource-rich provinces such as Shanxi, Ningxia and Qinghai. Meanwhile, provinces not dependent on exports and commodity prices find they are not as seriously impacted by the slump.

In an ideal world, regions hurt more by recession should be accorded with more policy support. However, the Chinese government has adopted a uniform policy that overlooks regional differences.

As part of the 4 trillion yuan stimulus plan, all provincial governments were allowed to issue bonds to raise money. The level of provincial bonds issued is being seen as a bellwether for local government policies aimed at stimulating local economies.

In theory, the more badly a region is hit by the economic slump, the larger the amount of provincial bonds. But in practice, there is no such a correlation. Unlike other countries, China's local governments are more motivated by and also benefit more from the progress of local economies.

飞雪寒冰

Most scholars attribute China's economic success to the unique relationship between central and provincial governments. But I believe the seemingly equal support for different regions is practically encouraging provincial governments to vie for central government support. All provincial governments want to seize the opportunity and expand their local economies.

Under the "one size fits all" policy, the stimulus plan treats different regions equally. The package probably fits the Pearl River Delta and Yangtze River Delta areas, but may be too lax for other regions.

I think Fujian, Zhejiang and Guangdong – the provinces hit hardest by the downturn -- should get the most support, while Guizhou, Hainan, Jilin and Sichuan should get the least.